Growth may pick up, but concerns remain (State of Indian Economy, August 2018)

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Growth may pick up, but concerns remain (State of Indian Economy, August 2018)

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• Taking stock of the Indian Economy: 

1. Monsoon and Agri growth rate : Since the performance is not good (11 of 36 meteorological divisions had deficient rains), sown area is down. Estimates are that agri growth rate can be at best 3.4% (same as last year). 
2. Services sector : Since public expenditure is at a high level (esp. due to election year), it will do well. 
3. Industrial sector : The IIP data for Q1 is good. But link between IIP data and national income data on mfg. is poor. Companies are showing higher profits and revenues (on lower base). GST remains a WIP. Mfg sector may pick up. 
4. GDP growth rate : Q4 of 2017-18 picked up. At same rate, 2018-19 can be > 7%. Expectations are 7.3%, but there are definite risks.

• Risks factors: There are three – External environment, Banking system woes, and Fiscal situation. 

1. External environment : Trade wars have commenced. India is caught in the exchange between US and China. 
2. Iran and country-specific problems : It will impact crude oil price directly. We now face the reverse situation of worsening crude prices, and not a low-price bonanza.
3. Our CAD : It was at 0.6% of GDP in 2016-17 but was 1.9% of GDP in 2017-18. Since capital flows were high, our rupee was not depreciating rapidly. 
4. Trade deficit : Traditionally always high, it rose from 4.8% to 6% of GDP (from 2016-17 to 2017-18). India desperately needs to increase the exports growth rate.
5. Rupee Appreciation: If it appreciates in real terms, exports will be hit.  2018 saw capital outflows, and rising trade deficit, & rupee depreciated (a natural outcome). RBI should only intervene to ensure smoothness of the process.
6. The real story: Exchange rate is only one part of exports story – the other being better production efficiency and improved infra. And we have to find another fuel soon. 

• Banking system in tatters : It is not yet resolved. RBI FSR June 2018 showed PSBs Gross NPA ratio 15.6%. It is partly due to a new definition of NPA recognition too. But credit to industry is down badly. Recapitalisation is urgently needed.  Whatever the govt. does, it has to do it rather fast as this single problem is holding everything back. 
• Seems to be in control : At Q1 end, the fiscal deficit as a % of full year’s deficit was 68.7%, much less than last year’s. Two aspects important : GST, and proposed MSP hikes. 

1. GST collections : One doesn’t know the future at all, and if they fall short of projections, trouble! 
2. MSPs : For rice and wheat, unlimited procurement at MSPs is anyway done. Unclear about the rest. 
3. What if market price < MSP? (i) MP model (Bhavantar Bhugtaan Yojana) where state pays the difference, but that can be a great burden if price drop is sharp, and (ii) Govt. can buy excess production, to raise market prices.

• Poverty and unemployment: Despite the high growth rate projected, India needs (and is capable of) much more if we really want to generate jobs and reduce poverty.
• Summary : The growth projections for Indian economy present a mixed picture, but if we really want to create enough jobs and reduce poverty, the task ahead is very huge.

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